The Michael Fuljenz Metals Market Report: November 2011, Week 5 Edition

Gold fell below $1700 last week, as part of its long base-building period, but the recent slide ended on Monday morning, November 28, with another surge over $1700, reaching a morning high of $1722 before retreating to $1710 at 12:30 (EST). Barclays Bank said today that "a break above resistance near $1736 would confirm our view and open our targets near $1803 and then the $1840 area." Silver rose 3% to $32.39 on Monday morning before settling at $32.12, while platinum gained $20 to $1545 per ounce.

• Gold 52 weeks ago (November 29, 2010): $1357.00
• Gold's average price during 2011: $1563.12
• Gold's London Low for 2011: $1316.00 on January 28
• Gold's London High for 2011: $1896.50 on September 5

Last Week In Metals: Gold fell, but U.S. stocks fell even faster. European stocks are down an average 25% so far in 2011.

Great U.S. Retail Sales Will Translate into Rising Gold Sales

The "Black Friday" stories about record-sized mobs at the malls underline the fact that America is not exactly heading into a Greater Depression any time soon. Well before Thanksgiving, in the first 20 days of November, on-line sales were up 14% over the same 20 days last year, as more and more buyers jump the gun on "Black Friday," buying on-line specials, where they often save the cost of sales tax as well.

Third-quarter GDP figures were released last week, showing a drop to +2% for last quarter, down from a 2.5% initial estimate. While that headline sounds negative, most of the demand components are even stronger than first reported. Specifically, the primary reason for the downward GDP revision was a decline in inventories, which reflects strong consumer spending (+2.3% last quarter). Those inventories must be replaced, which connotes higher growth in this quarter. In addition, "domestic final sales" (which is consumer spending, plus business investment on plant and equipment) grew by an even stronger 3.1%.

This is a long way of saying that retail jewelry gold sales will likely be in good shape domestically this Christmas season. Some of the most common series of ads on TV this season are from Kay Jeweler's or Jared's, promoting the diamonds while showing the gold ring or bracelet holding the stones.

Gold Investment Demand is Rising Sharply

The World Gold Council's quarterly report contained its usual statistical gems. Here are some highlights:

Gold investment demand increased 33% (vs. the same three months of 2010), making the third quarter of 2011 the third-highest quarter of gold investment demand in history. Investment in gold bars and coins rose 29% while ETF holdings hit an all-time high.

Bringing those figures up to date, Barclays reported today that gold ETFs added more than seven tons of gold last week, raising their gold holdings to a new high of 2273.5 tons. SPDR Gold Shares (GLD) holds more than half of that, with almost 1300 tons, as investor's used last week's decline to buy gold ETFs.

China Continues to be the New "Wild Card" in Gold Demand

The World Gold Council third quarter report also stated that China's total demand of 612 tons of gold through the first three quarters of 2011 has already topped their demand for all of 2010. China has become a leading gold miner in recent years, but their domestic supplies can't meet demand. They will probably have to import 400 tons of gold this year, which is equal to the total combined gold demand for the Middle East, Turkey and Indonesia in 2010 - and that doesn't even include China's domestic gold.

The WGC says "China's increase in demand is being fueled by rising income levels, a by-product of China's rapid economic growth." The report talks about the creation of "100 million gold bugs" in China's rural areas. In addition, China's Gold Accumulation Plan (GAP), a joint effort of the Industrial & Commercial Bank of China (ICBC) and the WGC, allows Chinese investors to buy gold in tiny slices, down to the one-gram level, which is one-32nd of a Troy ounce, costing something like $55 per gram.

Caution: The European & American Financial Crisis is NOT Over!

Part of Monday's strong rise in the stock market (and gold) came from another one of those "relief rallies" when everyone thinks (for a few hours, anyway) that the European leaders will properly address their massive debt crisis. These massive debts may only be solved by a complete cultural revolution of an entitlement-addicted continent that spawns too few babies to support too-many early-retired government employees accustomed to their "free" medical care and cushy cash infusion each month. Tax evasion is serious in Europe. Many want, and often get, a "free lunch."

This addictive behavior reflects a continent in denial. This crisis won't end soon, or cleanly. Last week, sovereign debt was downgraded in two European countries (Portugal and Belgium), while France's debt rating is in jeopardy. European bond offerings were met with ultra-high interest rates in Italy (7.8% for two-year notes) and by severe buyer-resistance in Germany. If bond buyers avoid once-mighty Germany, it's very possible that the "euro" (as a unified continental currency) is on the ropes. This trend plays directly into the hands of gold investors, especially those in Europe, who want to invest in gold, not euros. They typically are not selling their gold coins to our buyers, or anyone else, causing intermittent supply disruptions.

Meanwhile, the Federal Reserve and the European Central Bank try to solve these political problems with monetary experiments, so they probably will print more money and devalue their paper promises, helping the Golden Constant to continue to gain in value over paper currency. Long term a rising gold market is typically bullish for many sectors of the gold coin market.

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